Shifting our attention to our Friendly Neighbor to the North, is there a “Rand Paul Moment” brewing in Canada, where the rights of up to a million Canadian citizens and the economic and sovereign interests of that country are threatened by a financial “drone strike” by the U.S. Treasury Department?

FATCA compliance costs for the world’s financial institutions are astronomical, and Canada’s banks are hoping that the federal government will negotiate an intergovernmental agreement (IGA) with the Americans that would allow them to report data on U.S. citizens to Canada Revenue Agency, which in turn would send it to the IRS. The U.S., to facilitate this approach, has written a Model Agreement to be used as a template for these bilateral tax agreements.

But a major obstacle to all this is Canada’s Charter of Rights and Freedoms, which prohibits (Section 15.1) discrimination based on several criteria, including “national or ethnic origin.” Constitutional expert Peter Hogg has pointed this out in a five-page letter to the Finance Department, which is co-ordinating the IGA negotiations with the US.

“In my opinion, the procedures mandate by the Model IGA are discriminatory in a way that would not withstand Charter scrutiny,” Hogg says in his letter. “These procedures effectively treat individuals differently, and adversely, based on an immutable personal characteristic, specifically citizenship. If Parliament were to enact legislation authorizing and permitting this type of differential and adverse treatment, the legislation would contravene the equality protections in section 15 of the Charter.”

Hogg’s letter goes on to point out that Section 1 of the Charter allows governments to impose reasonable limits to Charter provisions, but then argues “… any argument attempting to use Sec. 1 to justify limitations on the equality rights would be extremely weak. The objective of ensuring compliance with U.S. tax laws is probably not important enough to justify breaches of the Canadian Charter, and even if it was … the measures contemplated (by the U.S.) are grossly disproportionate to the objective.”

There are about one million people in Canada — the vast majority Canadian citizens — who have connections to the U.S. in one way or another. Some are “accidental” Americans — born in Canada to parents who are (or were) U.S. citizens; Americans who left the U.S. decades ago and thought they automatically renounced their U.S. citizenship when they became Canadians; and border babies — people born to Canadian parents in the U.S. who came home as infants.

Writes Whiteley: “Should Canada decide not to sign an IGA, the banks will be left to their own devices and will have to make their own deals with the IRS — a vastly more complicated and expensive process.” But, again, if Professor Hogg is right, in the absence of an IGA, Canadian banks won’t have the option of making their own deals with the IRS, because directly supplying the information demanded under FATCA would itself constitute a violation of the very same Canadian laws.

The upshot? It remains to be seen if a fever of adherence to the rule of law will break out in Canada. But if it does, officials in Ottawa may find themselves faced with a politician’s (and banker’s) worst nightmare: having to do the right thing. Instead of capitulating to Washington’s demands, Ottawa would be forced to find the courage to look American Treasury officials in the eye and inform them of countermeasures – including WTO and NATFA remedies, as well as lawsuits in American courts – they can expect if the U.S. Treasury were foolish enough to take the unwise, not to mention illegal (under international customary law and trade agreements), step of trying to expropriate 30% or Canadian institutions’ lawful income in reprisal for FATCA “recalcitrance.”

Meanwhile, in the rest of the world . . .

Turning from Canada, a must-have country for Treasury to force into the FATCA corral, other countries essential to a worldwide FATCA regime are looking even more doubtful.

As a first in the mainstream international media, Reuters financial reporter Patrick Temple-West has picked-up on and expanded on a story commented on earlier by Nigel Green, CEO of deVere Group: China (the world’s second largest economy after the U.S.), along with Hong Kong (a “Special Administrative Region” of China, and a top financial center), are also unlikely to sign IGAs or permit institutions to submit to the IRS’s diktat. Writes Temple-West:

The success of a broad U.S. crackdown on offshore tax dodging will be determined in part by China's cooperation, but talks with Chinese officials are making little headway, former U.S. Treasury Department officials and tax professionals said.

FATCA requires foreign financial institutions to tell the United States about Americans' offshore financial holdings.

One obstacle in the Chinese talks is likely that China wants, in return, more tax information than U.S. officials are willing to share about Chinese citizens who have assets in the United States, accountants and tax lawyers said.

China - the world's second-largest economy - is seen by some tax experts as an important participant if the U.S. Foreign Accounts Tax Compliance Act, or FATCA, is to work effectively, especially in Asia. [ . . . ]

China is seen as a critical part of the FATCA puzzle not only due to the country's own global economic prominence, but also because of its sway over Hong Kong, a major money center.

The Hong Kong Association of Banks said in a statement: "FATCA is an issue highly relevant to Hong Kong ... We have been and will closely follow relevant developments, in discussion with the Hong Kong Government."

The Financial Services and the Treasury Bureau of Hong Kong did not respond to questions.

It was unclear whether Hong Kong may be able to negotiate an IGA on its own with the United States. Hong Kong became part of China in 1997, but retained its own currency and local government. [ . . . ]

Foreign countries have pushed, with limited success, for reciprocal information sharing, but generally IGAs have not allowed an equal two-way sharing of taxpayer information.

With IGA negotiations in mind, the Obama administration is considering asking Congress for the power to require more disclosure by U.S. banks of information about foreign clients' accounts to those clients' home governments.

The IRS this year started giving some foreign governments information about interest payments earned by their citizens in U.S. bank accounts. This has already raised privacy concerns.

Adding to prospects of a BRICS-based opposition to FATCA, it now appears that Russia has broken off IGA talks with the U.S. and will forbid its institutions to comply. Writing in iExpats.com, Lisa Smith reports (“FATCA Hits The Buffers In Russia”):

Now Russia has stepped up to say implementing FATCA is illegal in the country as the rules are contrary to Russian and international laws.

The Russian Foreign Ministry has also declared that the country’s financial institutions would break local laws if they enter into any agreement with the IRS.

The Bank of Russia has backed up the Foreign Ministry’s stance and said that FATCA undermines the principle of equality among sovereign states.

One of the reasons why is [that there is] no similar agreement for US-based financial institutions to reveal the details of its foreign clients to other governments.

This is somewhat surprising, as Russia has earlier indicated not only its willingness to work with Washington on FATCA compliance but to help round up support from the other BRICS countries (notably China and India). In addition, recently President Vladimir Putin called for legislation prohibiting Russian officials from being allowed to hold foreign bank accounts at all, to hinder hiding corrupt assets abroad, and probably would have liked to have reached an equitable deal with Washington. But when it became clear that FATCA is not a bilateral cooperative agreement, no matter how the IGA is dressed up, but a unilateral imposition by Washington on the rest of the world, Moscow correctly concluded that sovereignty and the rule of law must prevail.

Britain, Switzerland: Time for Second Thoughts?

If China (and Hong Kong) and Russia stay firm in putting their independence and sovereignty first, and especially if even Canada willy-nilly does likewise, it’s not too soon to state that FATCA already has been exposed as a failure. The question then would be, how much damage is the U.S. Treasury Department willing to inflict on the United States and on the global financial system in a vain attempt to vindicate this badly misguided approach to tax enforcement? And second, will countries that already have “drunk the FATCA Kool-Aid,” starting with the United Kingdom (the first country to sign a “reciprocal” Model 1 IGA) and Switzerland (the first to sign a “nonreciprocal” Model 2 IGA), realize they’d been “had” and stop action on ratifying the agreement?